Is your investment strategy overlooking something?
Most of the discussion involved in setting investment strategy centers around age and personal risk tolerance. However, it is possible that two people of the same age with the same appetite for risk should pursue markedly different investment strategies. The X-factor separating the investment approach of these two otherwise similar people could be the nature of their jobs.
Whether it is a matter of choosing conservative or aggressive 401(k) options, or whether to treat your personal brokerage account as a casino or a safe haven, a properly coordinated investment strategy should have a risk profile that takes into account the financial risk factors inherent in your job.
Job factors to consider when developing your investment strategy
How should the nature of your job factor into your investment strategy? The following are some examples:
1. Steadiness of income
Most people are paid at a steady weekly or hourly rate, but for some jobs the pay is much more erratic. Commissions or bonuses may come in large chunks, with relatively lean spells in between. These commissions or bonuses are likely to be contingent upon performance, and thus might not be a sure thing.
Somebody with regular pay can take a longer-term investment perspective and thus invest in riskier securities. In contrast, a person with more erratic and less certain income would be wise to hold back a reserve in a savings account to help tide them over periods between big paydays.
2. Job security
Besides the regularity of your pay, job security should also factor into your investment approach.
Whether it is your personal standing in the company or just the nature of the industry you are in, some jobs are more secure than others. Can you envision yourself in the same career five or ten years from now, or do you feel uncertain as to what you'll be doing in six months?
A more secure job can allow you to take more risk by choosing more aggressive 401(k) options or investing your personal brokerage account more heavily in stocks. If you are concerned about job security though, you might want to counter that uncertainty by choosing more stable investments.
3. Pension benefits
While traditional, defined benefit pension plans have almost disappeared from the private sector, they are still common in public-sector jobs such as teaching or government work.
Having a clearly-defined stream of pension income in your future allows you to take more risk with other investments such as your personal brokerage account. However, if your retirement income depends entirely on how your investments perform, you may want to take a more moderate approach, especially as you near retirement age.
4. 401(k) plan employer match
If you have a 401(k) plan rather than a defined benefit pension, the performance of the investment options you choose could go a long way towards determining what kind of retirement nest egg you have. However, the strength of your employer's matching contributions - if any - can help mitigate the impact of volatility and thus allow for a more aggressive approach.
The stronger your employer's match - a 50 percent match is most common - the more fresh money you'll have flowing into the 401(k) plan over time. That makes it easier to overcome investment setbacks. A smaller or no match plan makes it harder to recover, and thus you may want to choose less aggressive 401(k) options.
5. Investment diversity
"Invest in what you know" is a common piece of investment advice, but it's not always the best idea.
People who have a tendency to invest in industries they know the best may have the bulk of their investments tied up in the same type of businesses that their jobs depend upon. The clearest examples of this are people who invest heavily in their employer's company stock. This was one of the things that made the Enron debacle especially damaging - employees put much of their retirement savings in Enron stock, and thus suddenly found their jobs gone and a big chunk of their retirement savings wiped out as well.
From a diversification standpoint, it is wiser to invest away from the industry your job depends upon, and especially avoid doubling-down by betting your job and your investments on the same company.
Defining your investment strategy
The importance of job factors in setting investment strategy does not mean that you should ignore traditional considerations like age and your personal appetite for risk-taking. All of these things should inform your investment strategy, and you should make an effort to formally outline that strategy.
A formal investment strategy should include goals, asset allocation parameters, and benchmarks for measuring performance. If you have both a pension or 401(k) plan at work and a personal brokerage account, your investment strategy should also contain guidelines for coordinating your personal investments with your retirement accounts.
The benefits of formalizing your investment strategy include keeping focused on the long-term by setting goals, and defining allocation parameters so your approach doesn't get off track. Both bull and bear markets can stir emotions that are damaging to investors. A formal investment strategy can take some of the emotion out of your decision making, and aligning that strategy with the nature of your job can bring your career and retirement planning in sync.